<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
------- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 1, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
------ THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to _________________
Commission file number 0-21794
GENZYME TRANSGENICS CORPORATION
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(Exact name of registrant as specified in its charter)
Massachusetts 04-3186494
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
175 Crossing Boulevard, Framingham, Massachusetts 01702
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(Address of principal executive offices) (Zip Code)
(508) 620-9700
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Registrant's telephone number, including area code
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X . No .
------- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT NOVEMBER 6, 2000
----- -------------------------------
Common Stock, $0.01 par value 29,629,950
<PAGE>
GENZYME TRANSGENICS CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE #
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<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1 - Unaudited Consolidated Financial Statements
Consolidated Balance Sheets as of October 1, 2000 and January 2, 2000 ...........3
Consolidated Statements of Operations for the Three Months and Nine Months
Ended October 1, 2000 and October 3, 1999 .......................................4
Consolidated Statements of Cash Flows for the Nine Months Ended
October 1, 2000 and October 3, 1999 .............................................5
Notes to Unaudited Consolidated Financial Statements.............................6
ITEM 2
Management's Discussion and Analysis of Financial Condition
and Results of Operations ......................................................11
ITEM 3
Quantitative and Qualitative Disclosures About Market Risk .....................15
PART II. OTHER INFORMATION
ITEM 2
Changes in Securities ..........................................................16
ITEM 6
Exhibits and Reports on Form 8-K................................................16
SIGNATURE ...............................................................................17
EXHIBIT INDEX............................................................................18
</TABLE>
2
<PAGE>
GENZYME TRANSGENICS CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED, DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
OCTOBER 1, JANUARY 2,
2000 2000
------------- --------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 35,332 $ 7,782
Marketable securities 33,673 42
Accounts receivable, net of allowance of $731 and $888 at
October 1, 2000 and January 2, 2000, respectively 11,891 11,335
Unbilled contract revenue, net of allowance of $75 for both periods 11,809 8,516
Other current assets 2,112 1,929
------------ ------------
Total current assets 94,817 29,604
Net property, plant and equipment 36,548 34,302
Costs in excess of net assets acquired, net 16,401 17,260
Other assets 13,735 3,146
------------ ------------
$ 161,501 $ 84,312
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,773 $ 2,977
Accounts payable - Genzyme Corporation 1,621 559
Payable to ATIII LLC 3,184 2,151
Revolving line of credit - 15,750
Accrued expenses 10,563 9,667
Deferred contract revenue 8,347 9,218
Current portion of long-term debt and capital leases 3,543 3,149
------------ ------------
Total current liabilities 31,031 43,471
Long-term debt and capital leases, net of current portion 11,782 13,897
Deferred lease obligation 797 779
------------ ------------
Total liabilities 43,610 58,147
Stockholders' equity:
Preferred stock, 5,000,000 shares authorized of which 20,000 shares have
been designated Series A convertible and 12,500
shares have been designated as Series B convertible - -
Series B convertible preferred stock; $.01 par value; no shares
and 6,602 shares were issued and outstanding at October 1, 2000 and
January 2, 2000, respectively - -
Common stock, $.01 par value; 40,000,000 shares authorized;
29,623,660 and 22,601,296 shares issued and outstanding
at October 1, 2000 and January 2, 2000, respectively 296 226
Dividend on preferred stock (2,727) (2,653)
Capital in excess of par value - preferred stock - 6,647
Capital in excess of par value - common stock 196,459 87,895
Unearned compensation - (284)
Accumulated deficit (76,111) (65,625)
Accumulated other comprehensive loss (26) (41)
------------ ------------
Total stockholders' equity 117,891 26,165
------------ ------------
$ 161,501 $ 84,312
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
GENZYME TRANSGENICS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- ---------------------------
OCTOBER 1, OCTOBER 3, OCTOBER 1, OCTOBER 3,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
Services $ 19,199 $ 14,544 $ 51,564 $ 41,934
Sponsored research and development 3,169 5,219 10,906 11,200
----------- ----------- --------- -----------
22,368 19,763 62,470 53,134
Costs and operating expenses:
Services 15,743 11,888 43,364 35,472
Research and development
Sponsored 3,906 3,017 10,434 7,805
Internal 958 1,169 2,872 3,347
Selling, general and administrative 5,053 4,912 14,346 14,616
Facility consolidation costs - 1,245 - 1,245
Equity in loss of joint venture 977 853 3,185 2,696
----------- ----------- ----------- ----------
26,637 23,084 74,201 65,181
----------- ----------- ----------- ----------
Loss from operations (4,269) (3,321) (11,731) (12,047)
Other income (expense):
Interest income 1,175 19 2,765 39
Interest expense (420) (654) (1,340) (1,668)
Other income - - - 484
------------ ----------- ---------- -----------
Loss from operations before income taxes (3,514) (3,956) (10,306) (13,192)
Provision for income taxes 32 48 180 207
------------ ----------- ----------- ------------
Net loss $ (3,546) $ (4,004) $ (10,486) $(13,399)
Dividend to preferred shareholders - - 74 -
----------- ----------- ----------- ------------
Net loss available to common shareholders $ (3,546) $ (4,004) $ (10,560) $(13,399)
============ =========== =========== ============
Net loss per common share (basic and diluted) $ (0.12) $ (0.20) $ (0.38) $ (0.69)
============ =========== =========== ============
Weighted average number of shares
outstanding (basic and diluted) 29,100 20,150 27,949 19,356
============ ============ =========== ============
Comprehensive loss:
Net loss $ (3,546) $ (4,004) $ (10,486) $(13,399)
Other comprehensive income (loss):
Unrealized holding gains (losses) on
available for sale securities 32 22 15 (18)
------------ ------------ ----------- ------------
Total other comprehensive income (loss) 32 22 15 (18)
------------ ------------ ----------- ------------
Comprehensive loss $ (3,514) $ (3,982) $ (10,471) $(13,417)
============ ============ =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
GENZYME TRANSGENICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
OCTOBER 1, OCTOBER 3,
2000 1999
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (10,486) $ (13,399)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 5,261 4,652
Amortization of unearned compensation 1,715 86
Amortization/accretion marketable securities (659) -
Shares issued for 401-K employer match 567 511
Equity in loss of joint venture 3,185 2,696
Loss on disposal of fixed assets 2 -
Changes in assets and liabilities:
Accounts receivable and unbilled contract revenue (3,849) 161
Inventory and other current assets (183) (690)
Accounts payable 796 (644)
Accounts payable - Genzyme Corporation 1,062 (1,067)
Other accrued expenses 779 2,137
Deferred contract revenue (871) (1,157)
----------- ------------
Net cash used in operating activities (2,681) (6,714)
Cash flows from investing activities:
Purchase of property, plant and equipment (6,004) (4,652)
Investment in joint venture (2,152) (2,468)
Purchase of marketable securities (42,741) -
Redemption of marketable securities 9,784 -
Cash paid for acquisition of SMIG (26) -
Other assets 75 (468)
----------- ------------
Net cash used in investing activities (41,064) (7,588)
Cash flows from financing activities:
Net proceeds from the issuance of common stock 74,964 -
Net proceeds from the exercise of warrants 6,820 -
Net proceeds from employee stock purchase plan 874 759
Net proceeds from the exercise of stock options 6,203 61
Proceeds from long-term debt 361 4,600
Repayment of long-term debt (2,195) (1,869)
Net borrowings (payments) under revolving line of credit (15,750) 4,654
Other long-term liabilities 18 (66)
----------- ------------
Net cash provided by financing activities 71,295 8,139
----------- ------------
Net increase (decrease) in cash and cash equivalents 27,550 (6,163)
Cash and cash equivalents at beginning of the period 7,782 11,740
----------- ------------
Cash and cash equivalents at end of period $ 35,332 $ 5,577
=========== ============
Noncash investing and financing activities:
Issuance of stock for acquisition of SMIG $ 11,054 $ -
Property acquired under capital lease - 1,781
Technology license acquired by issuance of stock - 1,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
GENZYME TRANSGENICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
These unaudited condensed consolidated financial statements
should be read in conjunction with the Company's Annual Report
on Form 10-K for the fiscal year ended January 2, 2000 and the
financial statements and footnotes included therein. Certain
information and footnote disclosures normally included in
financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted
pursuant to Securities and Exchange Commission rules and
regulations.
The financial statements as of October 1, 2000 and for the
three and nine months ended October 1, 2000 and October 3,
1999 are unaudited but include, in the Company's opinion, all
adjustments (consisting only of normally recurring
adjustments) necessary for a fair statement of the results for
the periods presented.
2. ACCOUNTING POLICIES:
The accounting policies underlying the quarterly financial
statements are those set forth in Note 2 of the financial
statements included in the Company's Annual Report on Form
10-K for the year ended January 2, 2000.
Per share information is based upon the weighted average
number of shares of Common Stock outstanding during the
period. Common stock equivalents consisting of warrants and
stock options, totaled 3 million at October 1, 2000 and common
stock equivalents consisting of warrants, stock options and
convertible preferred stock, totaled 5.5 million at October 1,
1999. Since the Company was in a net loss position in the
periods ended October 1, 2000 and October 3, 1999, these
common stock equivalents were not used to compute diluted loss
per share, as the effect was antidilutive.
Included in the net loss for the nine months ended October 1,
2000 is the Company's equity in the loss of a joint venture of
$3,185,000 which represents the Company's commitment to fund
its 30% share of the losses incurred in 2000 of the joint
venture between the Company and Genzyme Corporation ("ATIII
LLC"). Total net losses of the ATIII LLC in the first nine
months of 2000 were $10.6 million and the ATIII LLC did not
record any revenues.
6
<PAGE>
Marketable securities are held as available for sale and can
be summarized as follows, in thousands:
At October 1, 2000 Amortized Cost Estimated Fair Value
-------------------- ---------------------
Government backed
obligations $ 2,995 $ 2,997
Corporate obligations 30,229 30,676
=========== ===========
Total Investments $ 33,224 $ 33,673
=========== ===========
At January 2, 2000, the amortized cost and estimated fair value
of the Company's marketable securities was $42,000.
At October 1, 2000, the contractual maturities of the
Company's short-term investments available for sale range from
over 3 months to 24 months. All of the Company's investments
are classified as short-term which is consistent with their
intended use.
3. NEW ACCOUNTING PRONOUNCEMENT:
In March 2000, the Financial Accounting Standards Board
("FASB") released FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation" ("FIN 44"),
an interpretation of Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25"). FIN
44 provides guidance for certain issues that arise in applying
APB 25. The adoption of FIN 44 has not had a significant
effect on our financial position and results of operations.
4. NON-EMPLOYEE OPTIONS:
The Company had outstanding options to non-employees which
have been accounted for in accordance with Emerging Issues
Task Force ("EITF") 96-18 and FASB Interpretation No. 28 ("FIN
28"), which require the Company to remeasure the fair value of
these options at each reporting period prior to vesting and
then finally at the vesting date of the option. The Company
had a number of outstanding options held by individuals who
were employed by Genzyme Corporation, and who were
"non-employees" for purposes of FIN 28. Due to the decrease
and subsequent stability of the Company's stock price in 1998
and 1999, the amounts expensed for those years were not
significant. During 2000, the Company recorded $1.7 million of
expense relating to these options to reflect the increase in
value of the Company's common stock and the acceleration of
the vesting of unvested options held by non-employees who
were employed by Genzyme Corporation effective June 30, 2000.
7
<PAGE>
5. INCOME TAXES:
Due to the profitability of some if its contract research
laboratories in certain states, the Company has recorded a
provision for income taxes for the period ended October 1,
2000. This is solely a provision for state, not federal,
income taxes.
6. FACILITY CONSOLIDATION COSTS:
During the first quarter of 2000, the Company paid $282,000
relating to the facility consolidation reserve recorded in
1999, which had a balance of $943,000 at January 2, 2000. Of
this amount, $64,000 related to severance and $218,000 related
to rental and lease terminations.
During the second quarter of 2000, the Company paid an additional
$234,000 of which $85,000 related to severance and $149,000 related
to rental and lease terminations.
During the third quarter of 2000, the Company paid an additional
$61,000 of which $42,000 related to severance and $19,000 related
to rental and lease terminations.
The Company recorded a reduction to the reserve of $15,000,
$18,000 and $24,000 in each quarter ended October 1, 2000,
July 2, 2000 and April 2, 2000, respectively, based on changed
circumstances. Similarly, the Company has increased the rental
and lease termination reserves for an additional $16,000,
$18,000 and $78,000 at October 1, 2000, July 2, 2000 and April
2, 2000, respectively, based on changed circumstances. These
reductions and changes have been included in selling, general
and administrative expenses in 2000. The remaining balance of
the severance accrual and the rental and lease termination
accrual as of October 1, 2000 was $4,000 and $0, respectively.
7. PUBLIC OFFERING:
In February 2000, the Company completed a public offering of
3.5 million shares of common stock at $20 per share. The
underwriters exercised their option to purchase an additional
525,000 shares of its common stock to cover overallotments. In
total, the Company issued 4,025,000 shares, including the
underwriter's overallotment, with net proceeds to the Company
of $75 million. After the completion of the public offering,
the Company paid down the outstanding balance of $15.8 million
on its revolving credit line which remains fully available for
future borrowing.
8
<PAGE>
In conjunction with the offering, the Company issued a Notice
of Redemption to Genzyme for all outstanding shares of the
Company's Series B Convertible Preferred Stock (the "Series B
Preferred Stock"). Prior to the effectiveness of this
redemption, Genzyme converted the Series B Preferred Stock
into 1,048,021 shares of common stock. The Company paid a cash
dividend of $157,000 in conjunction with the conversion of
which $83,000 and $74,000 was recorded in the fourth quarter
of 1999 and the second quarter of 2000, respectively. As a
result of the offering, the $6.3 million Genzyme credit line
was eliminated. As of October 1, 2000, Genzyme owned
approximately 26.5% of the Company's common stock. If Genzyme
exercises all of its outstanding warrants, its ownership would
be 27.8%.
8. SERIES A CONVERTIBLE PREFERRED STOCK WARRANT EXERCISE:
In March 2000, the Company issued a warrant call notice for
450,000 warrants to purchase common stock which had been
issued in connection with the Company's 1998 private
placement. The notice permitted the Company to redeem the
warrants unless they were exercised prior to redemption. Each
warrant had an exercise price of $15.16 per share. All of the
warrants were exercised in March prior to the redemption date,
resulting in proceeds to the Company of $6.8 million.
9. ACQUISITION OF SMIG
On September 29, 2000, the Company terminated a joint venture
with Sumitomo Metals Industries, Ltd. and an affiliate
("Sumitomo") by issuing an aggregate of 333,334 shares of its
common stock valued at approximately $11.1 million, plus
transaction costs of $143,000. In exchange, Sumitomo
transferred to a wholly-owned subsidiary of the Company all of
the outstanding shares of SMI Genzyme Ltd., a Japanese
corporation, held by Sumitomo. As a result, the Company
directly and indirectly holds all of the outstanding equity in
SMI Genzyme Ltd., and has the exclusive marketing rights to
transgenic technology in 18 Asian countries, including Japan.
For accounting purposes, the value of the transaction was
accounted for as a purchase. Accordingly, the entire purchase
price of $11.2 million has been allocated to the value of the
marketing rights, which are being amortized over 15 years
based on the estimated economic useful life of these rights.
9
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10. SEGMENT INFORMATION:
Below is the Company's segment information for its two
reportable segments: contract research organization
("Primedica") and research and development ("Transgenics").
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------- -----------------------------
October 1, October 3, October 1, October 3,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Primedica - external customers $ 19,199 $ 14,544 $ 51,564 $ 41,934
Primedica - intersegment
570 332 1,021 1,108
Transgenics 3,169 5,219 10,906 11,200
------------- ------------- ------------- -------------
22,938 20,095 63,491 54,242
Elimination of intersegment revenues (570) (332) (1,021) (1,108)
============= ============= ============= =============
$ 22,368 $ 19,763 $ 62,470 $ 53,134
============= ============= ============= =============
Income (loss) from operations:
Primedica $ 557 $ (36) $ 172 $ (1,313)
Transgenics (2,766) (17) (6,069) (3,307)
Unallocated amounts:
Corporate expenses (1,083) (2,415) (2,649) (4,731)
Equity in loss of joint venture (977) (853) (3,185) (2,696)
========== =========== =========== ===========
$ (4,269) $ (3,321) $ (11,731) $ (12,047)
========== =========== =========== ===========
</TABLE>
11. SUBSEQUENT EVENT:
On November 2, 2000, the Company and Genzyme Corporation
executed a non-binding letter of intent which contemplates the
purchase by GTC of Genzyme's interest in the ATIII LLC, the
joint venture between the two companies. The letter of intent
is subject to approval of both companies' Boards of Directors.
10
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED OCTOBER 1, 2000 AND OCTOBER 3, 1999
Total revenues for the three-month period ending October 1, 2000 were $22.4
million, compared with $19.8 million for the comparable period in 1999, an
increase of $2.6 million or 13%. Service revenues from the Company's Primedica
subsidiary increased to $19.2 million in the third quarter of 2000 from $14.5
million in the third quarter of 1999, an increase of $4.7 million or 32%. The
increase in service revenues is due to an intentional shift in the mix of
Primedica services to faster growing service areas such as metabolism and
pharmacokinetics, formulation chemistry, analytical chemistry and bioproduction.
Research and development revenue from the Company's transgenic development
business decreased to $3.2 million in the third quarter of 2000 from $5.2
million in the third quarter of 1999, a decrease of $2 million or 38%. The
decrease reflects the recognition of revenue in the 1999 period of $3.5 million
in performance based milestones from development programs, partially offset by
development revenue from a greater number of transgenic programs in 2000.
Cost of services for the third quarter of 2000 were $15.7 million compared to
$11.9 million for the comparable period in 1999, an increase of $3.8 million or
32% primarily due to the increase in revenues. Sponsored research and
development expenses increased to $3.9 million in the third quarter of 2000 from
$3 million in the third quarter of 1999, an increase of $900,000 or 30%. The
increase in sponsored research and development expense was due to an increase in
the number of transgenic programs. Proprietary research and development expenses
decreased to $1 million in the third quarter of 2000 from $1.2 million in the
third quarter of 1999, a decrease of $200,000 or 17%, reflecting a reduction in
work being performed on proprietary research and development programs due to
allocation of personnel to funded research and development.
Gross profit, defined as revenues less service costs and research and
development costs, for the third quarter of 2000 was $1.8 million versus a gross
profit of $3.7 million in the third quarter of 1999. Gross margin on services
for the third quarter of both 2000 and 1999 was 18%. There was a loss of
$737,000 on sponsored research and development for the third quarter of 2000,
versus a gross profit of $2.2 million in the third quarter of 1999. The decrease
in sponsored research and development gross margin reflects the recognition of a
$3.5 million milestone in the third quarter of 1999, which significantly
increased gross margin for that period.
Selling, general and administrative ("SG&A") expenses increased to $5.1 million
in the third quarter of 2000 from $4.9 million in the third quarter of 1999, an
increase of $200,000 or 4%. The increase is primarily due to a non-cash expense
attributed to non-employee stock options.
11
<PAGE>
Interest income increased to $1.2 million in the third quarter of 2000, from
$19,000 in the third quarter of 1999, due to the investment of the proceeds
generated by the public offering in February 2000. Interest expense decreased to
$420,000 in the third quarter of 2000 from $654,000 in the third quarter of 1999
due to a decreased balance on outstanding borrowings in 2000.
The Company recognized $1 million of joint venture losses incurred on the joint
venture ("ATIII LLC") between the Company and Genzyme Corporation ("Genzyme")
during the third quarter of 2000 as compared to $853,000 incurred during the
third quarter of 1999.
Due to the profitability of some of its contract research laboratories in
certain states, the Company has recorded a provision for state income taxes
during the third quarter of 2000.
NINE MONTHS ENDED OCTOBER 1, 2000 AND OCTOBER 3, 1999
Total revenues for the nine-month period ending October 1, 2000 were $62.5
million, compared with $53.1 million in the comparable period of 1999, an
increase of $9.4 million or 18%. Service revenues increased to $51.6 million
during the first nine months of 2000 from $41.9 million in the comparable period
of 1999, an increase of $9.7 million or 23%. The increase in service revenues is
due to an intentional shift in the mix of Primedica services to faster growing
service areas such as metabolism and pharmacokinetics, formulation chemistry,
analytical chemistry and bioproduction. Research and development revenue
decreased to $10.9 million during the first nine months of 2000 from $11.2
million in the comparable period of 1999, a decrease of $300,000 or 3%. The
decrease in research and development revenue is due to revenue earned in 1999 on
the achievement of $2 million and $3.5 million performance based milestones,
partially offset by revenue earned in 2000 from an increasing number of
transgenic programs.
Cost of services during the first nine months of 2000 were $43.4 million
compared to $35.5 million in the comparable period of 1999, an increase of $7.9
million or 22%, primarily due to the increase in revenues. Sponsored research
and development expenses increased to $10.4 million in the first nine months of
2000 from $7.8 million in the comparable period of 1999, an increase of $2.6
million or 33%. The increase in sponsored research and development expense is
due to an increase in the number of transgenic programs. Proprietary research
and development expenses decreased to $2.9 million in the first nine months of
2000 from $3.3 million in the comparable period of 1999, a decrease of $400,000
or 12%. The decrease is primarily due to a concentration of resources on
sponsored research and development programs in the first and third quarter of
2000. Proprietary research and development expenses fluctuate from quarter to
quarter.
As a result of increased revenues, gross profit for the first nine months of
2000 amounted to $5.8 million versus a gross profit of $6.5 million in the
comparable period of 1999. Gross profit on services for the first nine months of
2000 was $8.2 million, resulting in a gross margin of 16%, versus a gross profit
on services of $6.5 million, and a gross margin of 15%, in the comparable period
of 1999. The increase in services gross margin is primarily due to the increase
in revenues. Gross profit on sponsored research and development for the first
nine months of 2000 was $472,000, resulting in a gross margin of 4%, versus
gross profit on sponsored research and development of $3.4 million, and a gross
margin of 30%, in the comparable period of 1999. The decrease in sponsored
research and development gross margin is due to the impact of lump-sum milestone
revenue earned in the 1999 period, partially offset by an increase in the number
of transgenic programs in 2000.
12
<PAGE>
SG&A expenses decreased to $14.3 million in the first nine months of 2000 from
$14.6 million in the comparable period of 1999, a decrease of $300,000 or 2%.
The decrease is primarily due to SG&A cost reductions at Primedica resulting
from its facility consolidation program and a decrease in the transgenic
insurance and legal expense, partially offset by the expense attributed to the
vesting and acceleration of non-employee stock options.
Interest income increased to $2.8 million in the first nine months of 2000, from
$39,000 in the comparable period of 1999, due to the investment of the proceeds
generated by the public offering in February 2000. Interest expense decreased to
$1.3 million in the first nine months of 2000 from $1.7 million in the
comparable period of 1999 due to a decreased balance on outstanding borrowings
in 2000. The Company did not record any other income in the first nine months of
2000, while it recorded $484,000 in the comparable period of 1999, due to the
receipt of an insurance settlement.
The Company recognized $3.2 million of joint venture losses incurred on ATIII
LLC between the Company and Genzyme during the first nine months of 2000 as
compared to $2.7 million incurred during the comparable period of 1999.
Due to the profitability of some of its contract research laboratories in
certain states, the Company has recorded a provision for state income taxes
during the first nine months of 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash, cash equivalents and marketable securities of $69 million
at October 1, 2000. Of this amount, cash and cash equivalents totaled $35.3
million at October 1, 2000. During the first nine months of 2000, the Company
had a $27.6 million net increase in cash. Sources of funds during the period
included $88.9 million of net proceeds from issuance of common stock comprised
of $75 million from the public offering, $6.8 million from the exercise of
warrants and $7.1 million from the issuance of common stock under various
employee stock plans. Uses of funds during the period included $42.7 million
used to purchase marketable securities, $15.8 million used to pay down the bank
revolving credit line, which remains fully available for future borrowing, $2.7
million used in operations, $6 million invested in capital equipment, further
expansion of the transgenic production facility and Primedica's laboratory
facilities and $2.2 million invested in the ATIII LLC. As a result of the 2000
public offering, the Genzyme credit line was eliminated.
The Company had working capital of $63.8 million at October 1, 2000 compared to
a deficit of $13.9 million at January 2, 2000. As of October 1, 2000 the Company
had $15.8 million available under a line of credit with a commercial bank, $2.9
million available under various capital lease lines and $793,000 available under
a term loan for facility expansion. The Company is preparing plans for expansion
of its transgenic production facilities in Central Massachusetts as well as
establishment of a second production site in order to facilitate growth in the
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number of development programs and commercialization of ongoing transgenic
programs. Although no significant contractual commitments have been made, it is
anticipated that this capital expansion will cost approximately $2.1 million in
the second half of 2000 and approximately $3.9 million in 2001.
As announced by the Company, on November 2, 2000, the Company and Genzyme
Corporation executed a non-binding letter of intent which contemplates the
purchase by GTC of Genzyme's interest in the ATIII LLC, the joint venture
between the two companies. The letter of intent is subject to approval of both
companies' Boards of Directors. In the event that the Company does acquire
Genzyme's interest in the ATIII LLC, our funding obligations for the ATIII
development program in 2001 and thereafter will substantially increase. In
addition, the Company has modified the clinical plan for ATIII, and our BLA
submission to the FDA will, under the new plan, be expected in 2002.
Under the Company's current operating plan, existing cash balances along with
funds available under the bank and lease lines are expected to be sufficient to
fund the Company through the next few years.
Management's current expectations regarding the sufficiency of the Company's
cash resources are forward-looking statements, and the Company's cash
requirements may vary materially from such expectations. Such forward-looking
statements are dependent on several factors, including the results of the
Company's Primedica business, the ability of the Company to enter into
transgenic research and development collaborations in the future and the terms
of such collaborations, the results of research and development and preclinical
and clinical testing, competitive and technological advances and regulatory
requirements. If the Company experiences increased losses, the Company may have
to seek additional financing through collaborative arrangements or from public
or private sales of its securities, including equity securities. There can be no
assurance that additional funding will be available on terms acceptable to the
Company, if at all. If additional financing cannot be obtained on acceptable
terms, to continue its operations the Company could be forced to delay, scale
back or eliminate certain of its research and development programs or to enter
into license agreements with third parties for the commercialization of
technologies or products that the Company would otherwise undertake itself.
NEW ACCOUNTING PRONOUNCEMENT
In March 2000, the Financial Accounting Standards Board ("FASB") released FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation" ("FIN 44"), an interpretation of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). FIN 44
provides guidance for certain issues that arise in applying APB 25. The adoption
of FIN 44 has not had a significant effect on our financial position and results
of operations.
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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company invests cash balances in excess of operating requirements in
short-term marketable securities generally government backed obligations and
corporate obligations with an average maturity of less than one year. All
marketable securities are considered available for sale. Because of the quality
of the investment portfolio and the short-term nature of the marketable
securities, the Company does not believe that interest rate fluctuations would
impair the principal amount of the securities. There have been no other material
changes in the Company's market risk since January 2, 2000. The Company's market
risk disclosures are discussed in its Form 10-K for the year ended January 2,
2000 under the heading Item 7A, Quantitative and Qualitative Disclosures About
Market Risk.
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PART II
ITEM 2: CHANGES IN SECURITIES
In September 2000, in order to terminate a joint venture between the
Company and Sumitomo Metal Industries, Ltd. and an affiliate
("Sumitomo"), the Company issued an aggregate of 333,334 shares of its
common stock to Sumitomo. In exchange, Sumitomo transferred to a wholly
owned subsidiary of the Company all of the outstanding shares of SMI
Genzyme Ltd., a Japanese corporation, held by Sumitomo. As a result,
the Company directly and indirectly holds all of the outstanding equity
in SMI Genzyme Ltd. The Company believes that the issuance to Sumitomo
qualified as a transaction by an issuer not involving a public offering
within the meaning of Section 4(2) of the Securities Act.
ITEM 6: EXHIBITS AND REPORTS ON FROM 8-K
(a) Exhibits
See the Exhibit Index immediately following the signature page.
(b) Reports on Form 8-K
No reports were filed on Form 8-K during the quarter ended
October 1, 2000.
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GENZYME TRANSGENICS CORPORATION AND SUBSIDIARY
FORM 10-Q
OCTOBER 1, 2000
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: GENZYME TRANSGENICS CORPORATION
BY:
---------------------------------
John B. Green
Duly Authorized Officer,
Vice President and
Chief Financial Officer
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EXHIBIT INDEX
EXHIBIT DESCRIPTION
27 Financial Data Schedule. (EDGAR only.)
